Preservation of Capital
There are many reasons that Real Estate has served as a great portfolio investment because it is a counterweight to inflation, as opposed to other forms of investment; it remains to have one distinct attribute, capital preservation. During times of high inflation, there are two things that specifically increase in value. Commodities such as copper, food, oil, other natural resources, and the cost of rents are a direct source of inflation so naturally, and in times of inflation, their prices go up also. What is a piece of residential real estate other than a basket of commodities? It contains raw materials like copper, petroleum products, steel, wood, and the labor costs. As the cost of living and these raw materials moves with inflation, so does the value of the property.
Just as commodities are a source of inflation, rents are a major factor in the return to investments in real estate. In fact, they play a much larger role in the Consumer Price Index than do commodity prices. Rents increase simultaneously with inflation, thus making it possible to have your initial investment returned quicker and with less valuable dollars; in addition, to providing a calculated return. Real Estate is also beneficial in that it can be used as a tax shelter via depreciation, provides tax deductions through expenses, allows the ability to do tax exempt exchanges, and in some cases, gets taxed at lower rates. When you purchase a property at a fixed price, the value of the basket of commodities you purchased increase with the rate of inflation as well as protect the value of your dollars that might have otherwise diminished. Some investors turn to gold during times of inflation to protect the buying power and speculation. Although gold can be a great investment, it really can only go up or down in value and must be sold to realize gains or losses, is difficult to leverage, does not produce rental income, and can present a challenge to store it on your own or high fees to have it stored for you.
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